An Indian Terrorism Case, With Links To Informal Cash Transfers

An Afghan dealer waits for customers at a money market in Kandahar province, in November 2012. The U.S. has started attacking the Taliban's funding channels ahead of withdrawing most of its forces from Afghanistan by 2014.

Ahmad Nadeem
/ Reuters/Landov

Originally published on October 9, 2013 5:41 pm

Police in India arrested the co-founder of an organization blamed for terrorist attacks across the country. But it was the revelations following the August arrest of Yasin Bhaktal, the alleged head of the Indian Mujahideen, that caught our eye.

The Times of India reported that Bhaktal's handlers in Pakistan sent him money through the hawala system. That, if you remember, is the widely used system of cash transfers that came under scrutiny following the attacks of Sept. 11, 2001. Some estimates put the hawala transfer system at billions of dollars each year

Matthew Levitt, a former FBI official now with the Washington Institute for Near East Policy, told WBUR in 2010 how the system worked:

"They'll be someone here in the United States, for example, who wants to move money to Pakistan, and they'll find a hawala dealer, or a hawaladar, who'll facilitate that transaction. At some point, that hawala dealer in Pakistan will have a customer who wants to send money here, and the hawala dealer here, in the United States, will reciprocate. And over time, their accounts will balance. So no money actually moves. Not through the formal or any informal financial system. What actually moves is communication, and they pay out through pots of money here and pots of money there."

That explains why counterterrorism investigators study the system closely: It's an easy way to send money around the world, and you can do it without scrutiny. That's probably why the would-be Times Square bomber used the system to transfer cash from Pakistan.

Is It Legal?

Now, mind you, the hawala system isn't illegal, as long as it's registered (that's the case in the U.S. and many other countries). And, as Levitt points out, "The vast majority — 99.9 percent of transfers that go through the hawala system — are perfectly legitimate."

But hawala exists in a sort of legal gray area. Two countries where it's widely used are India and Pakistan, and it's officially illegal in both.

Here's an excerpt from a paper on hawala put together by Treasury and Interpol (the full paper is worth reading):

"Many South Asian nations (such as India and Pakistan) have laws that prohibit speculation in the local currency, prohibit foreign exchange transactions at anything other than the official rate of exchange, and impose strict licensing requirements on money remitters and foreign exchange dealers. In addition, there are regulations governing inbound and outbound remittances. ...

"The important point for our purposes is that the existence of these regulations is another reason hawala is still used. Many people in these countries have money that they would like to move to another country due to concerns about stability, to pay for education or medical treatment. Hawala provides a ready means of doing this, and its use as a facilitator of capital flight on both large and small scales is very common."

In The U.S.

Law enforcement officials began to crack down on the financial networks used by terrorist groups following the Sept. 11 attacks. Among the recommendations after the attacks were licensing and registering hawala dealers.

As the Treasury Department noted: "The very features which make hawala attractive to legitimate customers (mainly expatriates remitting money to relatives in their home country) — efficiency, anonymity, and lack of a paper trail — also make the system attractive for the transfer of illicit funds."